Member criteria for audit committees.

Amid a growing concern about financial reporting, a major report focuses on fortifying standards of independence and 'financial literacy' of audit committee members.

Good governance dictates that the board be comprised of individuals with certain personal characteristics, such as a recognition of the importance of the board's tasks, integrity, a sense of accountability, a history of achievement, and the ability to ask tough questions. Directors also should possess certain core competencies - such as financial literacy, experience with organizations, leadership, and strategic thinking. Directors must have a significant degree of commitment to the company and its board - such that they have adequate time for meeting preparation, near perfect meeting attendance, and ongoing education as to the company's business and environment and topical issues. As a whole, the board should have individual directors who contribute special expertise relevant to the company, such as manufacturing, marketing, financial, accounting, and international or other appropriate experience. Most importantly, the board overall should consist of a majority of independent directors.

It follows that as a member of the full board each member of the audit committee should possess most of the characteristics and core competencies enumerated above. The Committee views certain of these attributes as particularly important for audit committee membership - namely, recognition of the significance of the audit committee's responsibilities, time commitment, financial literacy, and, above all, independence.

Independence

The rationale supporting the call for a majority of independent directors on a board of directors - that independence is critical to ensuring that the board fulfills its objective oversight role and holds management accountable to shareholders - is especially applicable to the audit committee. In fact, it is widely recognized that each member of the audit committee should be an independent director. Several recent studies have produced a correlation between audit committee independence and two desirable outcomes: a higher degree of active oversight and a lower incidence of financial statement fraud. In addition, common sense dictates that a director without any financial, family, or other material personal ties to management is more likely to be able to evaluate objectively the propriety of management's accounting, internal control and reporting practices.

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